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Cairn challenges ONGC to go for arbitration

Vol 14, PW 16 (10 Feb 11) People & Policy

Bill Gammell rightly had a smile on his face when in Delhi this week for talks on his blocked deal to sell a majority stake in Cairn India to Vedanta.

Behind the scenes, Gammell and everyone else at Cairn are quietly confident they have an open and shut case in their row with ONGC over its royalty obligations on Mangala crude – the main obstacle to completion of the $9.6bn deal with Vedanta. Cairn’s position was forcefully put on January 24 during a Management Committee meeting of the RJ-ON-90/1 block in Rajasthan, which includes Mangala.

During heated arguments, Cairn challenged ONGC to activate the ‘dispute resolution mechanism’ in the PSC if unhappy about its contractual obligation to pay all royalty on Mangala crude, despite holding only 30% equity in Mangala and other producing Rajasthan fields. In short, go for arbitration.

Cairn’s challenge was provoked by ONGC’s suggestion that its royalty obligation should be ‘cost-recoverable’ from Mangala production, currently at around 125,000 b/d. Quoting the PSC, Cairn objected, saying royalty is not cost recoverable and must be paid by the licensee, in this case ONGC.

“Royalty does not qualify to be part of the contract costs,” said Cairn, in minutes of the meeting seen by this report. “Cost recovery of royalty would also adversely affect the government’s economic interests.

” Could the government intervene, asked ONGC, to help resolve the problem No, said Cairn. The government’s job is to give its opinion, “but not to resolve the issue, for which there is a dispute resolution mechanism under the PSC.

Cairn also had something to ask of ONGC, saying it wants to presently claim $388m – of a total $627m - in exploration costs incurred prior to the Mangala development and the allocation of ONGC’s ‘back-in’ stake of 30%. ONGC said it had no objection in principle but wants to see more supporting documents. Cairn’s detractors say it has a habit of making unilateral decisions at Mangala, the most serious of which was hiring a third Weatherford rig, without ONGC’s consent. “Operating and Management Committee approvals are available for two rigs but Cairn went ahead and hired a third rig on its own,” says a source, “about a year back and wants ONGC to pay its 30% share of the hire charges.” After initial reluctance, says Cairn, ONGC is now paying cash calls for third rig.

Cairn also had something to ask of ONGC, saying it wants to presently claim $388m – of a total $627m - in exploration costs incurred prior to the Mangala development and the allocation of ONGC’s ‘back-in’ stake of 30%. ONGC said it had no objection in principle but wants to see more supporting documents. Cairn’s detractors say it has a habit of making unilateral decisions at Mangala, the most serious of which was hiring a third Weatherford rig, without ONGC’s consent. “Operating and Management Committee approvals are available for two rigs but Cairn went ahead and hired a third rig on its own,” says a source, “about a year back and wants ONGC to pay its 30% share of the hire charges.” After initial reluctance, says Cairn, ONGC is now paying cash calls for third rig.